TaxTMI 
TaxTMI 
2025 (3) TMI 1162
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.... of appeal in ITA No. 4674/Mum/2024 : "1. The Ld. CIT(A) has erred in law and in facts in not appreciating that the assessment order passed u/s 143(3) r.w.s. 144B of the Act dated 28.09.2021 is invalid and bad in the eyes of law. 2. The Ld. CIT(A) has erred in law and in facts in passing the appellate order u/s 250 of the Act in violation of principles of natural justice. 3. The Ld. CIT(A) has erred in law and in facts in passing the order u/s. 250 of the Act dated 15.07.2024 partly confirming the additions made in the assessment order passed u/s 143(3) r.w.s. 144B of the Act dated 28.09.2021 which is bad and invalid in the eyes of law. 4. The Ld. CIT(A) has erred in law and in facts in partly confirming the action of Ld. AO in making disallowance of provision for claim payout amounting to Rs. 682,09,65,697/- [Rs. 903,60,99,374/- (-) Rs. 221,51,33,677/-]." 3. The Assessee has also raised the following additional ground on 21/10/2024: "1. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and in facts in not deleting entire addition of Rs. 978,76,84,517/- made by the Ld. Assessing Officer being the closing balan....
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....ut as INR.9,78,76,84,517/- in the financial statements for the relevant previous year. Therefore, a show cause notice was issued to the Assessee seeking explanation in this regard. In the aforesaid notice it was stated that the Assessee had claimed deduction for Provision for Claim Pay Out on accrual basis whereas the Guarantee Fees was accounted for and offered to tax on receipt basis. It was alleged that the Assessee was following a hybrid system of accounting which was not permitted. Thus, the Assessee was asked to justify the deduction for Provision for Claim Pay Out of INR.9,03,60,99,374/- claimed by the Assessee. In response to the aforesaid show cause notice, the Assessee filed reply explaining that Assessee was following accrual system of accounting (and not hybrid system of accounting). The Guarantee Fees accrued to the Assessee and was paid to the Assessee on execution of contract for providing guarantee cover. Thus, in the case of the Assessee the guarantee cover started on payment of guarantee fee only and therefore, the accrual as well as the receipt was on the same date. However, the Assessing Officer was not convinced. The Assessing Officer concluded that the Assesse....
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....e before the Assessing Officer along with submission, dated 23/09/2021 [placed at Page No.173 and 15-40 of the Paper Book]. On perusal of the Trust Deed along with Notification [S.O.1443(E)], dated 18/04/2016, whereby the Scheme known as Credit Guarantee Funds for Micro Units (hereinafter referred to as 'Scheme') was notified, it becomes clear that the Assessee-trust was established to increase access to and availability of micro-loans to the eligible micro units and by providing guarantee cover to lenders (Banks/NBFCs/Financial Intermediaries) giving loans and advances without collaterals and/or third party guarantees to the eligible Micro Units. As per paragraph 4.1 of the Trust Deed the Scheme was to be operationalised and implemented by the Trustees (National Credit Guarantee Trustee Company Limited). The Scheme guaranteed payment to Banks/NBFCs/MFIs/Other financial intermediaries in the event of default in repayment of micro loans extended to the eligible borrowers. The relevant extract of the Scheme reads as under: "CHAPTER II : SCOPE AND EXTENT OF THE SCHEME 3. Guarantees by the Fund i. Subject to the other provisions of the Scheme, the Fund undert....
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....re to submit the information required by NCGTC for giving guarantee cover with regard to the micro borrowal account during the currency of the portfolio. iii. The MLI would need to furnish a Statutory Auditor Certificate/ Management Certificate as prescribed by the Fund from time to time, certifying the following: (a) All accounts in the portfolio conform to eligible micro loans sanctioned after the date of April 08, 2015. (b) All accounts covered in the initial portfolio as well as new accounts added in the portfolio subsequently, are standard accounts. (c) All accounts which have turned NPA within the portfolio and for which claim has not been lodged have to be included in the portfolio on which the guarantee fee is payable. iv. The statutory auditor/management shall certify the amount of non-performing asset of the crystallized portfolio as on the date of March 31 every year, by the second quarter of every financial year from the date of crystallization of the portfolio, during the currency of the portfolio. v. The lending institution shall closely monitor the borrower account and follow up for repayment. vi. The pay....
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....f the portfolio of micro loans for the full year or the broken period i.e. till March 31 of subsequent year, as the case may be, and the Guarantee will be valid upto the end of that financial year. It may be noted that for such sanctioned cases which have been cancelled/repaid/pre-paid/taken over during the currency of the portfolio, no guarantee fee shall be charged for such sanctioned cases in the portfolio and no guarantee cover would be applicable. b) During subsequent years. The guarantee fee will be paid on the sanctioned amount corresponding to the outstanding balance (including on accounts which have turned NPA) of the crystallized portfolio during the currency of the portfolio and Guarantee will be valid unto the end of that financial year Guarantee fee with respect to NPA accounts in the portfolio would continue to be paid till lodgment of claim for such accounts, at a rate specified by the Fund on the amount or fee based on risk based pricing/such other amount on such reference dates or specified rate act by the Fund from time to time (risk based guarantee for components given at Attachments in respect of 5 Models). The portfolio as at the end of third ....
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....be excluded for the claim. Out of the balance portion, the "extent of guarantee' will be to a maximum extent of 50% of "Amount in Default' in the portfolio or such other percentage as may be specified by the Fund from time to time on a pro-rata basis. ii. The guarantee cover will commence from the date of payment of guarantee fee and shall run through the agreed tenure of the repayment of Micro loan or the termination date of the portfolio, whichever is earlier, subject to yearly renewal of the guaranteed portfolio. iii. The overall guarantee payout for an MLI would be linked to exposure norms/payout caps as may be specified by the Fund from time to time CHAPTER V: CLAIMS 10. Invocation of guarantee i. The lending institution may invoke the guarantee in respect of the 'amount in default' out of the crystallized portfolio of micro loans, subject to the condition of first loss guarantee, after 1 year from the date of crystallization of the portfolio and thereafter, at the end of every financial year. ii. The MLI shall furnish a statutory auditor/management certificate confirming that the amount due and payable to t....
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....overed, interest shall be payable to the Fund by the lending institution at the rate stipulated by the Management Committee for the period for which payment remains outstanding after the expiry of the said period of 30 days." 14. On perusal of the above we find that the Guarantee Fee is paid for a contract between the Assessee and Member Lending Institution (MLI) for providing guarantee cover to the MLI. The accounting policy on 'Revenue Recognition' states - 'Guarantee fees is accrued on receipts of contacted amount from the member lending institutions'. The Assessing Officer has interpreted the same to mean that the Guarantee Fee is recognized by the Assessee on receipt basis. In our view, the aforesaid interpretation adopted by the Assessing Officer is not correct given the facts and circumstances of the present case. Paragraph 9. ii. of the Scheme [reproduced hereinabove] specifically states - 'The guarantee cover will commence from the date of payment of guarantee fee....'. Thus, the guarantee cover generally commences on payment of Guarantee Fee only. Therefore, it cannot be said that the Assessee is following receipt basis of accounting for recognition of Guarantee Fee si....
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....ximum to the extent of 50% of the amount of default. Further, there is an upper cap on the total Claim Pay Out at 15% of the total loan sanctioned amount. The independent actuary had further observed that the relevant previous year was the second year of valuation and there was a lock-in-period of 18 months for lodging the claims with the Assessee. It was opined that the using proxy default rates sourced from similar loans given was considered but rejected in view of the difference between the terms of the Scheme and the target borrower. Thereafter, default rates, which were reasonable in the opinion of the actuary, were adopted to arrive at the total expected Claim Pay Out (as on 31/03/2018) of INR.296,67,18,820/-. The Revenue has not doubted the bonafides of the actuarial valuation. The contention of the Revenue is that the rate of default has been determined on an ad-hoc basis. We note that the CIT(A) has allowed deduction for actual amount of Claim Pay Out. In our view, the CIT(A) has, in effect, allowed the Assessee to claim deduction for Pay Out on payment basis even though the Assessee was following accrual basis of accounting and therefore, the approach adopted by the CIT(A....
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....e of consistency addition made on account of Provision for Claim Pay Out should be deleted. 17. During the course of hearing, the Assessee was directed to submit the details regarding the actual Claim Pay Outs and in response to the same the Assessee furnished following details: Sr. No. Assessment Year Outstanding guarantee issued towards loans as on year end (INR Crores) Provisions for claim payout made during the year (claimed as expense) (INR Crores) Amount of NPAs of respective years settled and paid on approval (INR Crores) 1. 2016-17 6,705.55 - 489.80 2. 2017-18 16,902.08 37.13 506.18 3. 2018-19 39,966.46 425.44 1,077.26 4. 2019-20 50,848.61 903.61 926.55 5. 2020-21 54,990.46 1,431.66 529.65 6. 2021-22 71,067.94 2,667.30 1,817.50 7. 2022-23 74,262.57 6.78.77 687.41 Total 6,170.91 6,034.56 Difference between provision and claims settled 136.56 % Difference between provision and claims settled 2.21% 18. We note that the CIT(A) had allowed ....